How Legislated Corporate Sustainability Reporting will Reshape Business Sustainability in 2013

2013 promises to be an interesting year for corporate sustainability reporting. At the Rio +20 Earth Summit in June, the United Kingdom’s Government announced that all 1,800 companies listed on the London Stock Exchange will be required by law to report on their carbon emissions – starting in the new financial year from April 2013. For the broader European Union, the European Commission (EC) has a stated intention to introduce a legislative proposal by 2013 for non-financial reporting on the transparency of the social and environmental information provided by companies. The EC proposal is expected to cover a range of economic, social and governance KPI’s and to require commentary on a company’s supply chain. In the USA the recently promulgated Dodd-Frank Act will require – for business activities in calendar year 2013 onwards – many companies to publicly disclose their use of conflict minerals [tantalum, tin, tungsten, and gold] and state whether those minerals originated in the Democratic Republic of the Congo or adjoining countries. The Securities and Exchange Commission estimates that around 6,000 companies will be covered directly and many other enterprises impacted indirectly.

This article explores how the evolution of corporate sustainability reporting, from voluntary activity to enforced legal requirement, will catalyse significant changes for some key aspects of corporate sustainability practice. Five themes of transformation are examined, illustrating the breadth of change we can expect from developments in mandatory sustainability reporting.

Existing regimes of discretionary sustainability reporting tend to fall within the remit of the sustainability function, whereas mandatory sustainability reporting will most likely shift into the legal and compliance function, subsumed into the portfolio of the CFO or CCO (Chief Compliance Officer). In many ways this is a positive step for corporate sustainability as a whole, as sustainability practices and principles will see significant benefits from ownership and integration with the mainstream business. Previously published within a separate Sustainability or CSR report, sustainability disclosures will increasingly be integrated into the Annual Report or Directors’ Report, where it will gain greater attention from a broader audience – elevating a company’s sustainability credentials to sit alongside conventional business concerns.

Many would argue that the trend to such ‘Integrated Reporting’ – a holistic perspective on company performance – is already well established, even without legislation in place: for example, the International Integrated Reporting Council (IIRC) – a global coalition of regulators, investors, companies, standard setters, accounting profession and NGOs – already have 80 companies and 25 institutional investors participating in a pilot program for integrating sustainability reporting into mainstream corporate reporting. However, few would doubt that the implementation of legislative requirements on corporate sustainability reporting will be a game-changer in scope and quality of engagement in reporting, driving a step-change in level engagement and commitment from the corporate sector.

A further outcome from transitioned responsibility to compliance and financial ownership is that sustainability reporting overall may benefit from operation within a framework of well-established governance and processes for corporate compliance and financial management. Compliance and finance functions may be able to apply proven practices connected with other forms of compliance and reporting to bring additional efficiencies and effectiveness to sustainability reporting though cross-functional teams than could be achieved than sustainability functions, who typically have modest resources.

It would be a folly for a government or commission to legally require companies to disclose sustainability information and not to mandate requirements for reliability of the presented information. Regulatory sustainability reporting will likely lead to increased expectations on reporting quality than those associated with voluntary disclosure, with elevate needs for governance, transparency and assurance in the reporting process and the published information. Transparency of the underlying information sources, calculation methods, assumptions, relevance and scope will be essential to deliver confidence in reported facts – whether quantitative or qualitative. Furthermore, we would expect regulation to stipulate prescribed levels of assurance for reported data and underlying reporting processes.

Transparency and assurance cannot be easily achieved where spreadsheets and email are the information repositories and assessment platforms. Businesses will need tools delivering core capabilities around governance and auditability: for example, audit trails for data administration; clarity on source of provided data and validity of information; data management meta-data such as who last changed information; traceable processes of workflow and approvals; structured quality assessments of key information; management of the assurance process including assurance status of reporting elements and annotation from assurer.

Regulatory regimes will also bring expectations of demonstrable governance in the reporting processes. Companies will need to show adequate internal frameworks of responsibility and accountability across the entire reporting process – from gathering of information through to sign-off for the published content. For companies not yet fully evolved in sustainability reporting, this will require careful implementation of supporting systems and processes to get them to a new level of quality.

Harmonised disclosure standards will become vital to achieve clarity and consistency in information provision – a departure from current practices where under a voluntary regime reporting protocols can be more open. Regulatory approaches can be expected to catalyse more prescriptive, repeatable disclosure standards and provide additional impetus for harmonisation in metrics and implementation.

Statutory reporting of sustainability connected with supply chains will impact on relationships between suppliers and their customers. Suppliers can expect a sea-change in customer demands for economic, social and governance information connected with their enterprise and their goods and services. Compliance with regulatory reporting will typically lead to increased customer needs for reliability and timeliness in provision of sustainability information from customers. After all, information provision is now connected with a customer’s legal obligations.

Such is the nature of modern, global supply chains, the impact of regulatory reporting will be felt by companies located beyond the territory of jurisdiction. For example, European companies covered by EC legislation can be expected to request information from their major suppliers, wherever they are located in the world. Regional regulation can therefore be expected to result in propagated impact with global range.

Regulated reporting on supply chain sustainability will also bring a baked-in scaling factor to the impact of the regulation. For example, a global brand consumer products company may easily have tens of thousands of suppliers. No surprise then that for the Dodd-Frank Act, commentators believe the 6000 companies immediately covered by the regulation would through a trickle-down effect in the supply chain result in hundreds of thousands of suppliers being asked for information on the provenance on supplied goods.

Crucially for customer-supplier relationships, regulatory disclosure of corporate sustainability metrics – including supply chain dimensions – will not be a simple information sharing exercise. Disclosure typically leads to action with companies seeking to improve performance relative to previous years and relative to competitors. As we have seen in voluntary sustainable supply chain initiatives, where a customer’s performance is materially dependent on suppliers’ activities, customers will typically seek to collaborate and incentivise supplier engagement with supplier scorecards, shared targets and – in some cases – rewards of better commercial positions for the suppliers. Introducing regulatory supply chain sustainability disclosure, with expected scale and reach in global supply chains, will surely strengthen the drive for increased transparency and collaboration between customers and suppliers reflecting shared corporate responsibilities.

Transformation 4: A new paradigm in the business case for sustainability reporting

Crucially, the legal imperative will introduce a new paradigm for the business case in sustainability reporting. For many companies, there will be self-evident business benefits in ensuring compliance with a regulatory sustainability requirement: such benefits would typically include immediate concerns such as avoidance of legal costs, fines and other sanctions. Companies will be more able to present a solid business case for dedicating additional resources to sustainability reporting as a core compliance activity – connected with a “licence to operate”, rather than what may have been less easily justified voluntary green initiatives.

Brand building and brand protection will continue as a driver of the business case but with growing significance – the risk of reputational damage of prosecution for breaking a law is perhaps a different realm from reputational issues connected with abstention or poor engagement in voluntary sustainability reporting.

Regulation would see responsibility and ownership for sustainability reporting increasingly driven by relatively powerful Compliance functions with top-down mandates to deliver compliance. Furthermore, the Compliance department typically enjoys a strong degree of organisation buy-in for their activities, and a stronger budget and resource base to draw from than Sustainability colleagues.

For regulation connected with integrated or non-financial reporting, such as the imminent EU legislation proposal, ownership by the Finance function would contribute expertise and insight into the business case for delivering on mandatory reporting frameworks. Corporate Finance are well-versed in articulating the business imperatives, offer well established approval regimes and – like Compliance functions – bring significant corporate muscle to sustainability reporting activities.

Transformation 5: Infusion of IT vision and expertise

As Finance and Compliance become increasingly engaged or responsible for sustainability reporting, we can expect many companies to better leverage IT as an enabler of sustainability reporting. In many cases Sustainability teams lag their Finance and Compliance counterparts in IT literacy. Finance is a line of business with a long history of exploiting IT to reduce costs and drive innovation in financial practice. As a result Finance professionals are typically tech-savvy and more likely than Sustainability colleagues to understand the value of a robust IT backbone in providing the transparency and diligence required for enterprise and supply chain sustainability disclosure: Finance functions have experienced of the role IT can play, for example, in streamlining and automating processes, validating and auditing information, assurance of document trails, governance and workflow, rich analytics including modelling and forecasting, and risk management techniques.

Engagement of the Finance and Compliance functions will likely bring an imperative for a single source of truth in reported sustainability metrics: integrated, reconcilable systems will be demanded to ensure enterprise financial and compliance reporting connects to the same source data as regulated sustainability disclosure. For example, the payments to electricity suppliers must reconcile with electricity consumption underpinning a Corporate GHG report; the supplier information disclosed for Dodd-Frank must reconcile with your supplier transaction history in your supply chain management system.

Supply chain sustainability disclosure will undoubtedly benefit from innovation and new capabilities emerging in business IT. For example, mobile applications offer new opportunities for achieving supply chain traceability and managing the chain-of-custody by capturing information on movement of goods along the supply chain in settings where conventional computers are not viable, such as outdoor environments. Also, emerging supplier network solutions are able to provide previously unavailable visibility of upstream supply chains by piecing together the complete supply chain jigsaw of who supplies who, from agricultural or extractive source through to finished product.

New beginnings for corporate sustainability in 2013

So 2013 may be remembered for the emergence of regulatory sustainability reporting. The 5 transformations described above indicate the importance that such regulation will have on corporate sustainability reporting; transitioned responsibility for delivering reporting within an organisation, increased demand for quality in disclosed information, the imperative for transparency and sustainability collaboration between business customers and suppliers, a paradigm-shift in the business case, and the expectation of an infusion of IT vision and expertise from core business functions like Finance and Compliance along with the opportunity to leverage IT innovation. We live in interesting times.